65.A firm that produces a single product but owns plants in many different stages of the production process - for example, a steel producer that owns iron ore mines and rolling mills - best illustrates a:

A. vertically integrated firm.

66.In economics, a physical establishment such as a factory, farm, mine, store, or warehouse that performs one or more functions in fabricating and distributing goods is called a(n):

B. plant.

67.In economics, an organization that employs resources to produce goods and services for profit and operates one or more plants is called a(n):

D. firm.

68.An industry is best defined as a group of firms that:

B. produce identical or similar products.

69.A firm that makes computer chips at several locations across the country best illustrates a:

C. multiplant firm.

70.A group of plants that is owned and operated by a single firm and that consists of oil fields, refineries, and gasoline stations best illustrates a:

C. vertically integrated firm.

71.Eclectic Enterprises is a single firm that sells goods and services in the markets for health food, furniture, electric energy, and toys. Eclectic Enterprises is best described as a(n):

A. conglomerate.

72.The three basic legal forms of business enterprise are:

B. proprietorships, partnerships, and corporations.

73.Listed in descending order of total numbers, the business population is comprised of:

A. sole proprietorships, corporations, and partnerships.

74.The corporate form of business enterprise has promoted the development of large-scale business operations because:

B. corporations have been able to marshal large amounts of financial capital through the sale of stocks and bonds.

75.Suppose you own $50,000 of personal property, $5,000 of stock in General Statics Corporation, a $10,000 savings account, and $20,000 of government bonds. If General Statics goes bankrupt, the most you could lose is:

B. $5,000.

76.The owners of a firm face unlimited liability for the firm's debts in:

D. both a proprietorship and a partnership.

77.As it relates to corporations, the principal-agent problem is that:

B. the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals).

78.The Sherman Act of 1890 is an example of:

C. government attempting to maintain competition

79.The economic policies and programs of government affect all of the following except:

D. the underlying motives of consumers, workers, and firms.

80.Government may lessen income inequality by:

D. doing All of these.

81.When the production or consumption of a good involves an externality:

C. someone not involved in buying or selling the good is affected.

82.If a good's production creates substantial positive externalities and no negative externalities, then too:

C. little of the good will be produced unless firms are subsidized.

83.Suppose a product creates substantial negative externalities. If government adopts a policy that forces producers to pay these costs, the:

A. output of the product will decrease.

84.The Federal government requires automobile manufacturers to install pollution control equipment. This is an illustration of the:

D. internalization of external costs.

85.Externalities weaken the efficiency of the market system because they:

D. cause certain goods to be overproduced or underproduced.

86.Susie lives in a dorm and likes to play loud music in her room. Her neighbor Kara enjoys the same type of music and gets pleasure from Susie turning up the music. Her other neighbor, Alex, can't stand Susie's music and gets mad when she turns it up for all to hear. When Susie plays her music loudly, she creates:

A. a positive externality for Kara, and a negative externality for Alex.

87.Which of the following is a shortcoming of the market system?

B. Certain goods will not be produced because there is no way of excluding nonpaying ("free-rider") individuals from the associated benefits.

88.The main characteristics of a public good are:

A. nonrivalry and nonexcludability.

89.As it relates to a public good, nonrivalry means that:

D. one person's benefit from the good does not reduce the benefit available to others

90.Which list provides, in order, examples of a private good, a public good, and a quasi-public good?

B. an automobile, national defense, a national park

91.Fiscal policy:

B. refers to government spending and taxation policies aimed at promoting price stability and full employment.

16. Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the:

B. M1 money supply will not change.

17. Near-monies:

B. are certain highly liquid financial assets that do not function directly as a medium of exchange but can be readily converted into M1.

18. Which of the following does not explain what backs the money supply in the United States?

A. It is back by gold.

19. Suppose that the Federal government suddenly declared that wheat was to be used as money. What is a possible outcome of that decision?

D. All of these are possible outcomes.

20. The purchasing power of money and the price level vary:

A. inversely.

21. During periods of rapid inflation, money may cease to work as a medium of exchange:

D. because people and businesses will not want to accept it in transactions.

22. Stabilizing a nation's price level and the purchasing power of its money can be achieved:

C. with both fiscal and monetary policy.

23. The basic policy-making body in the U.S. banking system is the:

B. Board of Governors of the Federal Reserve.

24. The twelve Federal Reserve Banks:

C. hold the reserve deposits of commercial banks.

25. As it relates to Federal Reserve activities, the acronym FOMC describes the:

A. Federal Open Market Committee.

26. The Federal Open Market Committee (FOMC) is made up of:

D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.

27. Which of the following statements best describes the twelve Federal Reserve Banks?

C. They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare.

28. The seven members of the Board of Governors of the Federal Reserve System are:

A. appointed by the President with the confirmation of the Senate.

29. Research for industrially advanced countries indicates that:

A. the more independent the central bank, the lower the average annual rate of inflation.

30. Which of the following is a true statement?

C. The world's financial markets have become increasingly integrated.

31. Most modern banking systems are based on:

D. fractional reserves.

32. In a fractional reserve banking system:

C. banks can create money through the lending process.

33. Which of the following statements is correct?

B. A bank's liabilities plus its net worth equal its assets.

34. A bank that has liabilities of $150 billion and a net worth of $20 billion must have:

D. assets of $170 billion.

35. Which of the following are all assets to a commercial bank?

B. vault cash, property, and reserves

36. The primary purpose of the legal reserve requirement is to:

B. provide a means by which the monetary authorities can influence the lending ability of commercial banks.

37. Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves:

C. are $20,000.

38. Refer to row 1 in the above table. The number appropriate for space W is:

C. 10.

39. Refer to row 2 in the above table. The number appropriate for space X is:

D. $100,000.

40. Refer to row 3 in the above table. The number appropriate for space Y is:

B. $32,000.

41. Refer to row 4 in the above table. The number appropriate for space Z is:

A. $10,000.

42. When a check is drawn and cleared, the

B. bank against which the check is cleared loses reserves and deposits equal to the amount of the check.

43. Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves?

C. $24,000

44. Excess reserves refer to the:

D. difference between actual reserves and required reserves.

45. Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank:

D. cannot safely lend out more money.

46. A reserve requirement of 20 percent means a bank must have $1,000 of reserves if its checkable deposits are:

C. $5,000.

47. Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be:

B. 10 percent.

48. Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out:

C. $200,000.

49. Assume the Continental National Bank's balance statement is as follows:

Assuming a legal reserve ratio of 20 percent, how much in excess reserves would this bank have after a check for $10,000 was drawn and cleared against it?

C. $6,000

50. A commercial bank can expand its excess reserves by:

A. demanding and receiving payment on an overdue loan.

51. Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of:

C. $80,000.

52. Refer to the above data. This commercial bank has excess reserves of:

D. $5,000.

53. Refer to the above data. This bank can safely expand its loans by a maximum of:

D. $5,000.

54. Refer to the above data. Assuming the bank loans out all of its remaining excess reserves as a checkable deposit, and has a check cleared against it for that amount, its reserves and checkable deposits will now be:

B. $22,000 and $110,000 respectively.

55. Refer to the above data. If the original balance sheet was for the commercial banking system, rather than a single bank, loans and checkable deposits could have been expanded by a maximum of:

D. $25,000.

56. A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of:

D. $3,750.

57. Banks create money when they:

C. buy government bonds from households.

58. Which of the following would reduce the money supply?

C. Commercial banks sell government bonds to the public.

59. The Federal funds market is the market in which:

C. banks borrow reserves from one another on an overnight basis.

60. The transactions demand for money is most closely related to money functioning as a:

B. medium of exchange.

61. The asset demand for money is most closely related to money functioning as a:

C. store of value.

62. Which of the following statements is correct?

B. Interest rates and bond prices vary inversely.

63. Refer to the above market for money diagrams. The asset demand for money is shown by:

65. Refer to the above market for money diagrams. The total demand for money is shown by:

C. D3.

66. Refer to the above market for money diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that the:

B. nominal GDP is $800.

67. Refer to the above market for money diagrams. If the interest rate was at 3 percent, people would:

A. sell bonds, which would cause bond prices to fall and the interest rate to rise.

68. Refer to the above market for money diagrams. If the interest rate was at 8 percent, people would:

B. buy bonds, which would cause bond prices to rise and the interest rate to fall.

69. Refer to the above market for money diagrams. If the Federal Reserve increased the stock of money, the:

B. S curve would shift rightward and the equilibrium interest rate would fall.

70. Reserves must be deposited in the Federal Reserve Banks by:

B. all depository institutions, that is, all commercial banks and thrift institutions.

71. Federal Reserve Notes in circulation are:

B. a liability as viewed by the Federal Reserve Banks.

72. Which of the following will increase commercial bank reserves?

A. the purchase of government bonds in the open market by the Federal Reserve Banks

73. When a commercial bank borrows from a Federal Reserve Bank:

C. the commercial bank's lending ability is increased.

74. The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits:

B. and reserves of commercial banks both decrease.

75. The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits:

A. of commercial banks are unchanged, but their reserves increase.

76. The four main tools of monetary policy are:

C. the discount rate, the reserve ratio, the term auction facility, and open-market operations.

77. The Fed can change the money supply by:

D. doing all of these.

78. Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is:

D. directly increased by $4 million and the money-creating potential of the commercial banking system is increased by an additional $12 million.

79. Which of the following statements is correct?

B. Excess reserves are the amount by which actual reserves exceed required reserves.

80. Which of the monetary policy tools can alter both the level of excess reserves and the money multiplier?

B. the reserve ratio

81. The discount rate is the interest:

B. rate at which the Federal Reserve Banks lend to commercial banks.

82. Which of the following tools of monetary policy is considered the most important?

C. open market operations

83. Which of the following tools of monetary policy is flexible, and able to affect bank reserves quickly and by relatively specific amounts?

C. open market operations

84. Which of the following statements is true?

C. The Federal Reserve does not set the Federal funds rate, but it influences it through the use of open market operations.

85. Reserves borrowed at the Federal funds rate are usually repaid:

D. the next day.

86. According to the Taylor rule, when real GDP is at its potential and inflation is at its target rate of 2 percent, the Fed should:

D. keep the Federal funds rate at 4 percent.

87. Which of the following best describes the cause-effect chain of an expansionary monetary policy?

D. An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

88. Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures?

A. a tax increase and an increase in the money supply

89. If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to:

A. sell government securities, raise reserve requirements, raise the discount rate, and reduce the amount of reserves available through the term auction facility.

90. Which of the following best describes the cause-effect chain of a restrictive monetary policy?

B. A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

91. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for:

B. buying government securities, reducing the reserve ratio, reducing the discount rate, increasing reserves available through the term auction facility, and a budgetary deficit.

92. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3, labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 8 percent and the goal of the Fed is full-employment output of Qf, it should:

C. decrease the interest rate from 8 to 6 percent.

93. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to reduce or eliminate demand-pull inflation, it should:

A. increase the interest rate from 4 percent to 6 percent.

94. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 6 percent and the goal of the Fed is full-employment output of Qf, it should:

D. maintain the interest rate at 6 percent.

95. Monetary policy is thought to be:

C. more effective in controlling demand-pull inflation than in moving the economy out of a depression.

96. Compared with fiscal policy, monetary policy is:

A. quicker and easier to implement.

97. One of the strengths of monetary policy relative to fiscal policy is that monetary policy:

A. can be implemented more quickly.

98. The problem of cyclical asymmetry refers to the idea that:

A. a restrictive monetary policy can force a contraction of the money supply, but an expansionary monetary policy may not achieve an increase in the money supply.

1.What type of economic flow would be illustrated by the purchase of a Mexican candy-making factory by a U.S. corporation?

C. Financial flow

2. What type of economic flow would be illustrated by the sending of price data on farm equipment to a foreign company so that it can consider purchasing farm tractors?

D. Information flow

3. What type of economic flow would be illustrated by the emigration of chemical engineers from Germany to the United States?

B. Resource flow

4.In terms of dollar volume of exports and imports, the most important trading partner for the United States is:

A. Canada

5.Which is both a principal commodity import and export of the United States?

B. Automobiles

6.The United States has a trade deficit when U.S.:

A. Imports are greater than U.S. exports

7.What is one way that the deficit of the United States in goods and services is financed?

B. By selling real assets of the U.S. to foreigners

8.Which factor has contributed significantly to more international trade since the Second World War?

D. A general decline in tariffs

9.Which factor has greatly facilitated international trade since World War II?

C. Improved transportation

10.Which set of nations would be considered the major "players" in world trade in terms of the dollar volume of exports?

D. The United States and Germany

11.A distinguishing characteristic of multinational corporations is that they:

C. Have a large proportion of assets in foreign production and distribution

12.Nations specialize and engage in trade to:

B. Increase output and income

13.Specialization and international trade will:

C. Result in a rightward shift in a nation's production possibilities curve

14.When a nation has a comparative advantage in some product this means that:

B. It can produce that product at a lower domestic opportunity cost than can a potential trading partner

16.Refer to the above data. In East, the comparative cost of 1 unit of:

B. Food is .5 units of clothing

17.Refer to the above data. Which of the following is true?

B. For West, the cost of 15 units of food is 5 units of clothing

18.Refer to the above data. Which statement about the two nations is correct based on the principle of comparative advantage?

C. West has a comparative advantage in the production of food

19.Refer to the above data. The terms of trade will be:

C. Between 2 and 3 units of food for 1 unit of clothing

20.Refer to the above data. Assume that East had specialized in the production of food at alternative A and that West had produced both products at alternative C. If the nations now specialized based on comparative advantage, the gains from specialization and trade are:

C. 6 units of food and 2 units of clothing

21.The depreciation of the U.S. dollar relative to the French franc would make a vacation trip to:

B. The United States less expensive for the French

22.If the U.S. dollar and Mexican peso exchange rate shows that one peso is worth $0.12, then an American computer that costs $1,500 would be worth how many Mexican pesos?

C. 12,500 pesos

23.Refer to the above table. From 2005 to 2006, what happened to the value of the Japanese yen and the value of the U.S. dollar?

C. The Japanese yen depreciated and the U.S. dollar appreciated

24.Refer to the above table. From 2005 to 2006, what happened to the value of the British pound and the value of the U.S. dollar?

C. The British pound depreciated and the U.S. dollar appreciated

25.Refer to the above table. Which statement is correct about the change from 2004 to 2005?

C. The euro appreciated in value relative to the U.S. dollar

26.Refer to the above table. In 2003, about how many Japanese yen did a U.S. dollar purchase?

43.GDP in an economy is $11,050 billion. Consumer expenditures are $7,735 billion, government purchases are $1,989 billion, and gross investment is $1,410 billion. Net exports are:

C. - $84 billion

44.Refer to the above data. Gross domestic product is:

B. $1,079 billion

45.Refer to the above data. Net domestic product is:

C. $1,054 billion

46.Refer to the above data. National income is

D. $1,019 billion

47.Refer to the above data. Personal income is:

B. $656 billion

48.Refer to the above data. Disposable income is:

A. $611 billion

49.The GDP deflator or price index equals:

C. Nominal GDP divided by real GDP

50.Refer to the above data. If year 2 is the base year, the price index for year 3 is:

C. 133

51.Refer to the above data. In year 4, nominal GDP would be:

B. $90

52.Refer to the above data. If year 2 is the base year, then Real GDP in year 5 is:

C. $60

53.Refer to the above data. If year 2 is the base year, then the percentage increase in real GDP from year 2 to year 4 is:

C. 80 percent

54.The above diagram is best described as an idealized:

A. Business cycle

55.Refer to the above diagram. The phases of the business cycle from points A to D are, respectively:

D. Peak, recession, trough, expansion

56.Refer to the above diagram. The straight line E drawn through the wavy lines would provide an estimate of the:

B. Growth trend

57.Which phase of the business cycle would be most closely associated with an economic contraction?

B. Recession

58.In the expansion phase of a business cycle:

D. Employment and output increase

59.A recession is a decline in:

C. GDP that lasts six months or longer

60.The level of total spending is the immediate determinant of the:

B. Level of real output and employment

61.Which statement is correct?

C. The production of nondurable consumer goods is more stable than the production of durable consumer goods over the business cycle

62.Which is the correct way to calculate the unemployment rate?

B. [(unemployed)/(labor force)J x 100

63.Assuming the total population is 200 million, the labor force is 100 million, and 92 million workers are employed, the unemployment rate is:

C. 8 percent

64.The unemployment rate in an economy is 6%. The total population of the economy is 290 million, and the size of the civilian labor force is 150 million. The number of unemployed workers in this economy is:

76.In an economy nominal GDP is $4,000 billion. The actual unemployment rate is 8 percent and the natural rate of unemployment is 6 percent. According to Okun's law there will be:

C. $160 billion lost in potential output

77.Inflation is a rise in:

A. The general level of prices over time

78.If the Consumer Price Index was 166.6 in one year and 172.2 in the next year, then the rate of inflation from one year to the next was:

A. 3.4%

79.Which measures the changes in the prices of a "market basket" of some 300 goods and services purchased by typical urban consumers?

B. The Consumer Price Index

80.The Consumer Price Index was 247 in year 1 and 272 in year 2. The rate of inflation in year 2 was:

B. 10 percent

81.If the annual inflation rate is 5 percent a year, about how many years will it take for the price level to double?

C. 14 years

82.Inflation caused by an increase in aggregate spending is referred to as:

C. Demand-pull inflation

83.Inflation caused by a rise in per unit production costs is referred to as:

A. Cost-push inflation

84.If the average level of nominal income in a nation is $45,000 and the price level index is 180, the average real income would be about:

C. $25,000

85.If the price level increases by 15 percent while nominal income increases by 8 percent, then in percentage terms real income would:

C. Fall by about 7 percent

86.Unanticipated inflation arbitrarily:

B. "Taxes" those who receive fixed money incomes

87.Assume that there is a fixed rate of interest on contracts for borrowers and lenders. If unanticipated inflation occurs in the economy, then:

D. Lenders are hurt, but borrowers benefit

88.A worker would be hurt least by inflation when the:

B. Worker is protected by a cost-of-livingadjustment clause in an employment contract

1. The most important determinant of consumption and saving is the:

B. level of income.

2. The MPC can be defined as that fraction of a:

B. change in income that is spent.

3. The 45-degree line on a graph relating consumption and income shows:

C. all the points at which consumption and income are equal.

4. As disposable income increases, consumption:

A. and saving both increase

5. In contrast to investment, consumption is:

B. relatively stable.

6. Tessa's break-even income is $10,000 and her MPC is 0.75. If her actual disposable income is $16,000, her level

of:

A. consumption spending will be $14,500.

7. Which of the following relations is not correct?

C. MPS = MPC + 1

8. Refer to the above data. The marginal propensity to consume is:

D. .80.

9. Refer to the above data. At the $200 level of disposable income:

B. dissaving is $5.

10. Refer to the above data. If disposable income was $325, we would expect consumption to be:

B. $305

11. The investment demand slopes downward and to the right because lower real interest rates:

C. enable more investment projects to be undertaken profitably.

12. Assume a machine which has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is:

C. 15 percent.

13. A decline in the real interest rate will:

A. increase the amount of investment spending.

14. The immediate determinants of investment spending are the:

A. expected rate of return on capital goods and the real interest rate.

15. The investment demand curve will shift to the right as the result of:

C. businesses becoming more optimistic about future business conditions.

16. Investment spending in the United States tends to be unstable because:

D. all of these contribute to the instability.

17. The multiplier effect means that:

C. an increase in investment can cause GDP to change by a larger amount.

18. The multiplier is useful in determining the:

D. change in GDP resulting from a change in spending.

19. The multiplier can be calculated as:

C. 1/(1 - MPC).

20. Refer to the above table. The marginal propensity to consume is:

C. .8

21. Refer to the above table. The marginal propensity to save is:

C. .2

22. Refer to the above table. The change in income in round two will be:

B. $16.

23. Refer to the above table. The multiplier in this economy is:

C. 5.

24. The Council of Economic Advisers has estimated that the actual multiplier for the U.S. economy is approximately:

D. 2.

25. A private closed economy includes:

C. households and businesses, but not government or international trade.

26. The equilibrium level of GDP in a private closed economy is where:

58. Refer to the above data. If the price level is 150 and producers supply $300 of real output:

A. a shortage of real output of $200 will occur.

59. Refer to the above data. If the amount of real output demanded at each price level falls by $200, the equilibrium price level and equilibrium level of real domestic output will fall to:

C. 150 and $300, respectively.

60. Refer to the above data. If the amount of real output demanded at each price level falls by $200, this might have been caused by:

B. a worsening of business expectations.

61. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by:

D. panels (A) and (B).

62. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Cost-push inflation is depicted by:

B. panel (B) only.

63. Refer to the above diagrams, in which AD1 and AS1are the "before" curves and AD2 and AS2 are the "after" curves. Growth, full-employment and price stability is depicted by:

C. panel (C) only.

64. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, an increase in investment spending is depicted by:

C. panel (C) only.

65. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in productivity is depicted by:

B. panel (B) only.

66. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by a change in incomes abroad is depicted by:

A. panel (A) only.

67. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decrease in resource prices is depicted by:

C. panel (C) only.

68. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, inflation is absent in:

D. panels (A) and (C).

69. In which of the following sets of circumstances can we confidently expect inflation?

C. aggregate supply decreases and aggregate demand increases

70. Discretionary fiscal policy refers to:

C. changes in taxes and government expenditures made by Congress to stabilize the economy.

71. Countercyclical discretionary fiscal policy calls for:

B. deficits during recessions and surpluses during periods of demand-pull inflation.

72. Fiscal policy refers to the:

A. manipulation of government spending and taxes to stabilize domestic output, employment, and the price level.

73. An economist who favors smaller government would recommend:

A. tax cuts during recession and reductions in government spending during inflation.

74. If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:

C. decreasing taxes by $25 billion.

75. If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion by:

B. reducing government expenditures by $20 billion.

76. In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full- employment GDP is $120 billion. To obtain price level stability under these conditions the government should:

A. increase tax rates and/or reduce government spending.

77. Which of the following represents the most expansionary fiscal policy?

B. a $10 billion increase in government spending

78. Refer to the above diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:

D. AD3.

79. Refer to the above diagram, in which Qf is the full-employment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at:

A. AD0.

80. Refer to the above diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2:

C. government should undertake neither an expansionary nor a contractionary fiscal policy.

81. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing:

B. a negative GDP gap.

82. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to:

C. increase government expenditures or reduce taxes.

83. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to:

B. reduce government expenditures or increase taxes.

84. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve full- employment output (exactly), government should:

D. reduce taxes by $80 billion.

85. Refer to the above figure. Suppose that the economy is currently operating at the intersection of AS and AD2,

and that the full employment level of output is Y. If contractionary fiscal policy and accompanying multiplier effects

move aggregate demand from AD2 to AD1, what will be the effect on real GDP and the price level?

B. Real GDP will fall to X and the price level will remain unchanged, assuming a ratchet effect occurs.

86. Which of the following best describes the built-in stabilizers as they function in the United States?

B. increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment.

92. The public debt for the above economy is:

D. $460 billion.

93. Other things equal, an increase of Treasury bonds from $100 billion to $120 billion in the above economy would:

B. increase the public debt from $460 billion to $480 billion.

94. Suppose the Federal government had budget deficits of $40 billion in year 1 and $50 billion in year 2 but had budget surpluses of $20 billion in year 3 and $50 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:

B. increased by $20 billion.

95. Suppose the Federal government had budget surpluses of $80 billion in year 1 and $120 billion in year 2 but had

budget deficits of $10 billion in year 3 and $40 billion in year 4. Also assume that it used its budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have:

D. decreased by $150 billion.

96. Which of the following is not a significant contributor to the U.S. public debt?

D. demand-pull inflation

97. Recessions have contributed to the public debt by:

A. reducing national income and therefore tax revenues.

98. As a percent of GDP, the United States public debt is:

C. lower than the public debts of several other major industrial nations.